Interbank Rates Dip

The interbank rate, the cost at which commercial banks borrow from each other, has fallen to almost the same level as the Central Bank Rate (CBR). The CBR is the rate at which commercial banks borrow from the Central Bank. Last week, the Monetary Policy Committee (MPC) decided to keep the CBR unchanged at 18% and as at the end of last week the interbank rate eased to a weekly average of 19.89%.

As of Wednesday last week, the weighted average interbank rate was 12.7% having fallen from 18.8% on Tuesday. This is a significant 6.1% dip. This fall in the interbank rates may be attributed to an increase in liquidity (an increase in the supply of money) due to the government spending- the government made payments for recurrent expenditure on Tuesday.

As at the end of the week, the interbank rate eased to a weekly average of 19.89%. This is higher than the rate experienced on Wednesday but it is still lower than the 23.13% experienced during the previous week.

Continued increases in money supply would lead to a further fall in the interbank rates and eventually lead to a general increase in loans extended to the public by the commercial banks. This increase in loans extended would be induced by lower interest rates on the loans offered by the banks.

It seems that this is the result that the MPC seeks to achieve by holding the CBR constant, though it may take longer than a single month and it may not be surprising if in the coming month the CBR is kept constant or just lowered by a small margin.

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